The first-quarter contraction means that China only needs to generate an additional 1.5 trillion yuan (in terms of 2019 prices) to compensate for the loss of working days. With the recovery in domestic activity, the quarterly growth profile is likely to be strongly positive.
External shocks caused by the global pandemic will drag on China’s second-quarter growth because exports accounted for 12 per cent of total industrial sales in 2019.
Many high frequency data in April signal economic activity is still lower than the same period in 2019. However, more workers will return to their workplaces with the relaxation of lockdown measures. Thanks to pent-up demand, a 9.6 per cent quarterly rebound will translate to 1.7 per cent annual growth in the second quarter.
Supportive policy measures have guided more lending to bolster fixed asset growth. This impact will likely be felt in second-half data, assuming the National People’s Congress convenes soon.
ANZ Research previously estimated the stimulus measures to be equivalent to 3.3 per cent of China’s GDP in 2019. It is now forecast to grow 3.8 per cent and 1.8 per cent in the final two quarters of the year, which translates to an annual growth of 1.8 per cent in 2020.
China’s reform-oriented approach is consistent with the recent monetary policy operations by the People’s Bank of China (PBoC). New regulations have trimmed commercial banks’ required reserves following the RRR cut announced previously.
However, the PBoC recently conducted an anticipated Medium Term Lending (MLF) facility of merely 100 billion yuan at a rate of only 20 basis points fewer. Following this cut, it reduced the five-year loan prime rate by only 10 basis points. This suggests, unlike western economies, the PBoC is reluctant to flood the banking system with liquidity.
Over the longer term the central bank’s policy stance prompts caution. If China’s economic indicators such as headline GDP really achieve a V-shaped rebound in 2021, the policy support may be ratcheted down from there.
Forget about 2020. ANZ Research prefers to think ahead of the curve and be vigilant about the policy direction.
Raymond Yeung is Chief Economist, Greater China, Zhaopeng Xing is China Markets Economist and Betty Wang is a Senior China Economist at ANZ.
The story originally appeared as an ANZ Research report. You can read the full report HERE.